Lessons learned from the market downturn
It’s been about a year since global stock markets started their recovery. While you can’t control the forces that led to the decline, you can learn from what happened and use this knowledge to help make the right investment moves in the future — so you can be prepared for an uncertain future.
What lessons should you take away from the market drop? Consider the following:
Look forward, not back: After a steep downturn, many investors “shy away” from stocks and stockbased mutual funds. But if you had done this following the decline that bottomed out in March 2009, you would have missed the sizable rally that followed. No one can really forecast market performance, but if you base all your investment decisions on yesterday’s results, you’ll eventually miss out on tomorrow’s opportunities.
Invest with discipline: A declining market tends to drag most investments down with it, but many investors made things worse for themselves by having previously chased after “hot” stocks, which fell hard — and, just as importantly, may have been inappropriate for their needs in the first place. By maintaining the discipline to stick with an investment mix that’s suitable for your risk tolerance and long-term goals, you can help blunt the impact of a market downturn.
Stay diversified: Different types of assets, such as stocks and bonds, often move in different directions. If a downturn hits one asset class particularly hard, and most of your investment dollars are tied up in that asset, your portfolio will take a bigger hit than if you had diversified across an array of investments. While diversification, by itself, cannot guarantee a profit or protect against loss, it can help reduce the impact of volatility and help give you more chances for success.
Borrow with caution: Excessive borrowing was a root cause of the global financial crisis — and, on an individual level, too much debt can be equally devastating. Unfortunately, in 2009, many Canadians increased their debt, despite tight credit conditions. Try to keep a lid on your debt load: the lower your debt payments, the more money you’ll have available to invest for retirement and other goals.
Protect what’s important: During the long market downturn, you may have been concerned about the value of your portfolio. Yet even as you take steps — such as diversi- fying your holdings — to help protect your portfolio from the effects of volatility, you also need to protect yourself against other risks that could disrupt your life. Specifically, make sure you have the proper amounts and types of insurance in place.
Follow time-tested principles: Which investors fared best during the market downturn and the recovery that followed? Those that have followed proven techniques, such as buying quality investments, staying invested, and rebalancing their portfolios as needed in response to changes in their individual situations, their goals or the economic environment.
Philosopher George Santayana once wrote: “Those who cannot remember the past are condemned to repeat it.” This thought certainly applies to investors who made some mistakes in response to the market downturn of 2008 and early 2009. But if you can learn the lessons from the volatility we’ve experienced, you’ll be positioned to continue making progress toward your financial goals — in good or bad markets.